Miller Industries, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing also reports unaudited fourth-quarter results. Unless noted otherwise, dollar amounts below are in millions.
Business context and financial performance
Miller Industries manufactures towing and recovery equipment, including wreckers, car carriers and transport trailers, for customers in North America and international markets. Sales are primarily made through independent distributors. Results improved amid higher demand and production, which management attributed to recovering economic conditions and improving consumer sentiment.
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $492.8 | $404.2 |
| Gross profit / gross margin | $53.0 / 10.7% | $42.4 / 10.5% |
| Income before taxes | $23.5 | $13.9 |
| Net income attributable to Miller Industries | $14.9 | $9.2 |
| Diluted earnings per share | $1.31 | $0.82 |
| Cash provided by operating activities | $9.9 | $1.2 |
| Cash and temporary investments at year-end | $39.6 | $42.9 |
| Working capital at year-end | $126.7 | $120.8 |
FY2014 sales rose 21.9%, while attributable net income rose approximately 61%. SG&A was nearly flat at $28.5 million and fell to 5.8% of sales from 7.0%. Net interest expense increased to $0.6 million from $0.4 million; foreign-currency transaction results shifted to a $0.4 million loss from a $0.1 million gain. The effective tax rate was 36.9%, compared with 37.3%.
In the fourth quarter, sales were $147.8 million versus $108.3 million a year earlier; operating income was $9.4 million versus $3.6 million, and attributable net income was $5.7 million versus $2.4 million.
Liquidity, debt, cash flow and capital allocation
- Operating cash flow improved to $9.9 million, but remained below net income. Receivables increased $36.4 million and inventories increased $3.3 million, partly offset by increases in payables and accrued liabilities.
- Investing activities used $5.3 million, primarily for property, plant and equipment. Financing activities used $6.6 million, primarily for dividends.
- No borrowings were outstanding under the $25 million revolving credit facility at year-end. The facility was renewed in December 2014 and matures March 31, 2017; it bears interest at LIBOR plus 1.50% when drawn and includes covenants that can restrict dividends.
- FY2014 dividends totaled $0.60 per share, up from $0.56 in 2013. A $0.16-per-share quarterly dividend was declared in March 2015.
Material changes, outlook and notable items
- Management plans to consolidate and expand its Pennsylvania manufacturing operations, with estimated project costs of approximately $22 million expected in 2015 and 2016. Timing and cost may change. The filing also lists $2.2 million of year-end commitments for construction and equipment acquisition.
- The company sold its interest in the Delavan joint venture on March 31, 2014. It reported $0.2 million of first-quarter losses directly attributable to Delavan, including the deconsolidation loss, and said its Greeneville facility stopped making Delavan products after the quarter. Management expects no further venture losses.
- Management expects cash on hand, operating cash flow and the available credit facility to be sufficient for cash needs in 2015 and the next several years, subject to business and economic conditions. The filing gives no numerical revenue or earnings guidance.
- Foreign currency translation reduced accumulated other comprehensive income by $2.5 million in 2014; the company reported a $0.4 million transaction loss in earnings.
- Potential distributor-default repurchase obligations had a maximum amount of $31.5 million at year-end. The company said the repurchased products provide collateral and that no repurchases were required in 2014 or 2013.
Risks, contingencies and controls
Key risks include the cyclical nature of demand; customers’ access to credit and distributor floor-plan financing; volatile steel, aluminum and other input costs; chassis availability; competition; foreign-currency exposure; and dependence on skilled labor. The company also cites risks from government-order variability, product liability and warranty claims, intellectual property disputes, conflict-minerals compliance, environmental and safety requirements, facility disruption, IT security, and credit-facility covenant compliance. Management states that ordinary-course litigation is accrued when probable and estimable and that any additional liability is not expected to materially affect financial position or results; outcomes remain uncertain.
The independent auditor issued an unqualified opinion on the consolidated financial statements and concluded internal control over financial reporting was effective as of December 31, 2014.
Important facts for investors to verify
- Whether the strong FY2014 sales and earnings growth continued, and whether the fourth-quarter improvement persisted.
- Receivables collection, inventory levels and operating cash conversion, given the substantial year-over-year increase in accounts receivable.
- The final cost, timing and expected returns of the planned Pennsylvania consolidation and expansion.
- Ongoing warranty costs: warranty expense increased to $2.0 million in 2014 from $1.1 million in 2013.
- Actual exposure under the $31.5 million maximum distributor repurchase commitments and compliance with credit-facility covenants.
- The impact of foreign exchange movements, input costs, and any future government-related orders on margins and demand.