Miller Industries, Inc. — Q3 2012 Form 10-Q
Business context and period. The company manufactures vehicle towing and recovery equipment. This unaudited report covers the three and nine months ended September 30, 2012; comparisons are with the corresponding 2011 periods. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $78.0 | $96.8 | $260.3 | $303.3 |
| Gross profit (sales less costs of operations) | $9.2 | $15.6 | $30.7 | $53.8 |
| Gross margin | 11.8% | 16.1% | 11.8% | 17.7% |
| Income before taxes | $2.4 | $8.0 | $10.0 | $30.0 |
| Net income | $2.9 | $4.9 | $7.4 | $18.1 |
| Diluted EPS | $0.26 | $0.41 | $0.66 | $1.49 |
Cash flow and liquidity. For the first nine months, operating cash flow was $0.2 million (versus $3.9 million in 2011); investing cash use was $2.0 million and financing cash use was $3.9 million. Cash declined $6.7 million from year-end 2011 to $43.5 million. At September 30, current assets were $157.6 million and current liabilities $44.1 million (current ratio approximately 3.6). The company had no borrowings under its $25 million revolving facility and no long-term obligations. It reported approximately $0.8 million of non-cancelable operating lease obligations and $0.9 million of capital-expenditure commitments.
Changes and management commentary
- Sales declined 19.4% in Q3 and 14.2% year to date. Management attributed the decline mainly to the absence of follow-on government-related orders from a prime contractor, partly offset by increased commercial activity.
- Costs of operations fell less rapidly than sales, increasing to 88.2% of sales in both 2012 comparison periods from 83.9% in Q3 2011 and 82.3% year to date. Management cited a greater mix of lower-margin chassis sales. SG&A dollars decreased, but SG&A as a share of sales increased to 8.6% in Q3 and 8.0% year to date.
- Net income and diluted EPS fell substantially year over year. Nine-month other income included a $0.8 million foreign-currency transaction gain, versus $18,000 in 2011. The 2012 tax results included approximately $1.4 million of tax benefits, primarily from domestic production deductions and research and other tax credits; Q3 recorded an income tax benefit.
- North American sales fell to $63.4 million in Q3 from $84.3 million; foreign sales rose to $14.5 million from $12.4 million. No customer represented 10% or more of 2012 sales; the largest customer had represented 22.3% of Q3 2011 sales and 29.2% of 2011 nine-month sales.
- Management said cash on hand, operating cash flow and available credit were expected to meet cash needs during 2012 and for the next several years, subject to operating performance and other factors. It continued cost controls, including reduced non-production headcount and administrative spending; no specific earnings or sales guidance was provided.
Risks, contingencies and unusual items
Management highlighted economic and industry cyclicality, customer credit and floor-plan financing access, fuel and transportation costs, raw-material prices and availability, and the timing and success of export and government orders. Foreign-exchange movements reduced accumulated other comprehensive income by approximately $1.0 million from year-end 2011. The company uses forward currency contracts; open contracts at quarter-end were structured to offset one another’s notional and fair values. Customer-default repurchase arrangements had a maximum potential amount of $25.2 million, mitigated by the value of the products; management considered the associated liability immaterial. Ordinary-course litigation is possible, but management did not expect uncovered liabilities to materially affect financial position or results. The filing reports no material changes to the prior 10-K risk factors.
Important facts for investors to verify
- Whether commercial demand can offset the loss of government-related orders and whether the sales mix improves gross margins.
- Whether operating cash generation recovers, given the low year-to-date cash flow and working-capital movements.
- The durability of reported earnings after the tax benefits and foreign-currency gains, and the effect of future currency movements.
- Availability of customer floor-plan financing, raw-material costs, and exposure under the $25.2 million maximum repurchase commitment.
- Compliance with credit-facility covenants, including dividend restrictions, and the company’s ability to fund dividends and committed capital spending.