Miller Industries, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; unaudited quarterly results are also disclosed. Unless otherwise noted, financial amounts below are in millions of dollars. The company manufactures towing and recovery equipment and sells primarily through independent distributors. The filing was signed March 6, 2019.
Financial performance and position
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Net sales | $711.7 | $615.1 | +15.7% |
| Gross profit / gross margin | $83.3 / 11.7% | $67.1 / 10.9% | Margin +0.8 percentage points |
| Operating income* | $43.8 | $31.5 | +39.0% |
| Net income | $33.7 | $23.0 | +46.6% |
| Diluted EPS | $2.96 | $2.02 | +46.5% |
| Cash from operations | $21.9 | $14.0 | +$7.9 |
| Capital expenditures | $13.3 | $24.7 | Lower, following facility projects |
*Operating income calculated as gross profit less selling, general and administrative expenses.
- Sales growth reflected stronger demand and economic conditions in domestic and international markets. North American sales rose to $574.8 million from $527.1 million; foreign sales increased to $136.9 million from $88.0 million.
- Costs of operations rose 14.7%, less than sales growth; management attributed improved gross margin mainly to product mix, production efficiencies and cost control. SG&A increased 11.2% to $39.5 million but declined as a share of sales to 5.6% from 5.8%.
- The effective tax rate fell to 19.0% from 24.1%, reflecting the Tax Cuts and Jobs Act, including the lower U.S. corporate rate and the foreign-derived intangible income deduction. Net income also benefited from higher sales and margins.
- Fourth-quarter 2018 sales were $180.0 million, operating income $11.3 million, net income $10.8 million and diluted EPS $0.95. Fourth-quarter 2017 comparatives were $159.7 million, $9.6 million, $9.3 million and $0.81, respectively.
- Cash and temporary investments were $27.0 million at year-end; working capital was $149.8 million. The $50 million unsecured revolving facility had $15.0 million drawn and $35.0 million available. Long-term obligations were $15.8 million, including the French subsidiary’s $0.76 million loan.
- Operating cash flow exceeded capital spending by approximately $8.6 million. Inventory increased to $93.8 million from $68.6 million and accounts receivable to $149.1 million from $132.7 million, reflecting higher activity and contributing to working-capital needs.
- Shareholders’ equity was $227.6 million, compared with $203.1 million. The company paid $0.72 per share in dividends in 2018, unchanged from 2017.
Material changes, outlook and risks
- Facility additions and renovations supported increased production; the Ooltewah administrative building was completed in 2018. Management expected 2019 capital expenditures to be lower than in 2016 and 2017 and more comparable to 2018, and stated that expected cash sources should meet needs during 2019 and for the next several years. No sales or earnings guidance was provided.
- The company amended its credit facility in December 2018, extending maturity to May 31, 2022 and reducing the applicable LIBOR margin to 1.00% or 1.25%, depending on leverage. The minimum tangible-net-worth covenant increased from $130 million to $160 million; reported tangible net worth was approximately $216 million. The company said it was compliant and expected continued compliance in 2019. Borrowings rose by a further $5 million in early 2019, to $20 million as of March 4.
- Several substantial military projects were scheduled to be completed during 2019. Management was pursuing replacement orders but noted their approval processes are lengthy and timing uncertain.
- U.S. tariffs and import restrictions in 2018 raised the company’s steel and aluminum costs. Price increases and component alternatives were used to offset cost pressure, but pass-through may lag or prove incomplete. Supplier delays, chassis availability and production-capacity constraints remain risks.
- Other material risks include cyclical demand and customers’ access to credit; foreign-exchange exposure and Brexit uncertainty; government-contract requirements and spending; skilled-labor availability; competition; cybersecurity and data-protection compliance; product warranty, liability and recall exposure; and potential disruption or loss at manufacturing facilities.
- Distributor-lender repurchase commitments had a maximum potential exposure of $49.7 million at year-end, down from $54.1 million; no repurchases were required in 2018 or 2017. Ordinary-course litigation was disclosed, with management not expecting uninsured liabilities to materially affect the company.
- Adoption of the new revenue standard had a small reported FY 2018 net-income effect of $6,000; it changed timing for painting-related performance obligations. The company expected the new lease standard to add approximately $2.3 million in lease assets and liabilities on January 1, 2019.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal control were effective.
Investor verification priorities
- Check whether higher demand and improved margins continued, and whether price increases offset tariffs, materials inflation and other input costs.
- Monitor working-capital absorption, particularly receivables and inventory, against operating cash flow and capital spending.
- Verify replacement military orders and the sales impact as scheduled projects conclude in 2019.
- Review credit-facility borrowing, covenant headroom, dividend restrictions and the company’s ability to fund commitments and dividends.
- Assess the magnitude and timing of distributor repurchase exposure, supplier constraints, and international and currency risks.