Miller Industries, Inc. — Q2 2019 Form 10-Q
Business context and period: The company manufactures towing and recovery equipment through domestic and European operations. This filing covers the three and six months ended June 30, 2019; balance-sheet comparisons are with December 31, 2018. Unless noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $222.346 | $176.888 | $419.559 | $336.048 |
| Gross profit | $25.213 | $21.279 | $47.810 | $39.706 |
| Gross margin | 11.3% | 12.0% | 11.4% | 11.8% |
| Net income | $10.683 | $7.600 | $19.343 | $14.270 |
| Diluted EPS | $0.94 | $0.67 | $1.70 | $1.25 |
| Cash dividends declared per share | $0.18 | $0.18 | $0.36 | $0.36 |
- Sales rose 25.7% in Q2 and 24.9% for the first half. Management attributed growth primarily to strong demand and increased domestic production capacity. Q2 domestic sales increased to $191.753 million from $143.137 million, while foreign sales declined to $30.593 million from $33.751 million. First-half domestic and foreign sales both increased.
- Gross margin declined year over year in both periods, which management attributed primarily to product mix; costs of operations increased to 88.7% of sales in Q2 and 88.6% for the first half.
- SG&A increased in dollars, mainly from customer and sales-related expenses, software costs and professional fees, but declined as a share of sales: 4.9% versus 5.5% in Q2 and 5.0% versus 5.7% for the first half. Effective tax rates were 20.7% and 22.4% for Q2 and the first half of 2019, respectively, down from 27.6% and 28.0% in 2018.
Cash flow, liquidity and debt
- First-half operating cash flow was $8.325 million, versus $6.091 million a year earlier. Investing cash outflow was $8.430 million, including $8.437 million of capital expenditures; financing cash inflow was $0.702 million. Cash increased $0.199 million to $27.236 million.
- At June 30, cash was $27.236 million, current assets $321.853 million and current liabilities $157.074 million; working capital was $164.779 million and the current ratio was approximately 2.05.
- Credit-facility borrowings were $20.0 million at June 30, versus $15.0 million at year-end. The unsecured revolving facility has a $50 million limit and matures May 31, 2022. A subsequent $5 million payment reduced the balance to $15 million at July 31, 2019. The company reported compliance with covenants and anticipated continued compliance.
- The company said cash on hand, operating cash flow and facility availability should meet cash needs for the remainder of 2019 and the next several years, subject to operating and other factors. First-half dividends paid totaled $4.103 million.
Changes, outlook and risks
- Increased production supported higher sales but also drove working-capital needs; management said first-half facility borrowings primarily financed those needs. Accounts receivable rose to $197.760 million from $149.142 million at year-end, while accounts payable increased to $129.449 million from $98.220 million.
- Management highlighted the cyclical industry, customer access to financing, raw-material cost and availability (including steel and aluminum tariffs), transportation and insurance costs, and the need to replace substantial military projects scheduled to be completed during 2019. The filing gives no quantified revenue or earnings guidance.
- Capital and other commitments at June 30 included approximately $7.997 million for property and equipment and $9.396 million in software license fees payable through 2025.
- Potential distributor-product repurchase exposure was capped at approximately $57.395 million. Management said the product value mitigates exposure and the related liability was neither material nor probable. The company also disclosed ordinary-course litigation and judged any uninsured exposure beyond accruals unlikely to materially affect its financial position or results.
- Foreign-currency translation reduced first-half other comprehensive income by $0.653 million; transaction currency losses were $0.315 million for the first half. The company also cited variable-rate debt and foreign-exchange exposure.
- Operating lease accounting was adopted in Q1 2019, adding $2.268 million of right-of-use assets and related obligations at adoption. Management reported effective disclosure controls and no significant change in internal control over financial reporting.
Important facts for investors to verify
- Whether strong demand and production capacity persist, particularly as scheduled military projects conclude, and how this affects sales growth and product mix.
- Whether gross-margin pressure from product mix and material costs changes, including the effects of tariffs and supplier availability.
- Collections, receivables and working-capital needs, and whether operating cash generation can support capital commitments, dividends and debt reduction.
- Credit-facility covenant headroom, variable interest costs and the status of the subsequent $5 million repayment.
- The extent and potential consequences of distributor repurchase guarantees, litigation, and the stated software and capital commitments.